Quarterly report pursuant to Section 13 or 15(d)

Derivative Liability

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Derivative Liability
6 Months Ended
Jun. 30, 2018
Derivative Liability [Abstract]  
DERIVATIVE LIABILITY

6 — DERIVATIVE LIABILITY

 

The Senior Secured Notes, Subordinated Notes, and the Convertible Notes included default provisions that required payment of significant penalties in the case of a default event (greater than 10% of the principal). These default payment provisions were determined to be derivative instruments, and derivative liabilities were recognized.

 

The probability of a liquidity event and consequent repayment of the issuance of the Senior Secured Notes and Subordinated Notes the time their issuance was sufficiently high that the resulting derivative liabilities were immaterial. The Company used the Monte-Carlo valuation model to determine the fair value of the derivative liability, using the following key assumptions for the six months ended June 30, 2018 and year ended December 31, 2017.

 

Underlying asset Common Stock
Common Stock Expected term (years) 5 years
Common Stock Volatility 90-92%
Risk free rate 1.67-2.45%
Event of default trigger Starts at 0%, then rises 0.5% per year to a maximum of 5%
Probability of Company Sale 45% by 12/31/17 25% by 12/31/18 25% by 12/31/19

 

The change in the fair value of the derivative liability for the six months ended June 30, 2018 and 2017 was not significant and therefore no gain or loss was recognized for the three or six months ended June 30, 2018 or 2017. (See Note 11 for extinguishment of debt and related derivative liabilities after June 30, 2018.)